Effectiveness of the Annual Budget in Altering Taxpayer Behaviour - Assignment Example

Historical Effectiveness Of The Annual Budget Name: Lecturer: Course: Date: Part A: Historical effectiveness of the annual budget The tax paid by tobacco market in the United Kingdom is estimated at nearly £14 billion. Cigarettes dominate the market by some 93% of all the duty paid by the market. The annual altering of the tax paid for tobacco products have led to changes in the behaviours of the smokers during the past 5 decades (Reed 2013). The retail tobacco products within the United Kingdom are subjected to great levels of taxation. Logically, tobacco remains the sole legal consumer product known to kill whenever it is applied as intended. It is also highly addictive. Indeed, statistics have showed that nearly 50% of the long-term users have been known to die from tobacco addiction (World Health Organization 2003). Using tobacco brings about substantial costs on the United Kingdom economy because of greater people’s spending on smoking-related health conditions as well as greater mortality rates for smokers who are in the labour force. For this reason, it is broadly acknowledged that tobacco is subject to greater taxation level to discourage people from using it. As of 2010, taxation accounted for nearly 75% of the retail cost of a pack of cigarettes (Reed 2013). This essay paper examines the historical data to explore the effectiveness of the annual budget in influencing tax payer behaviour. Earlier studies of the effect of increasing tobacco taxation have tended to centre on the direct effects of such changes in taxation on the revenues from tobacco taxation. Even with this, several indirect effects of increasing tobacco taxation exist as increasing the retail price of tobacco lead to reduced number of individuals who smoke in the United Kingdom. This has led to significant health benefits as regards reduction of the early deaths from health conditions related to smoking within the population. At the same time, fewer people within the labour force have been rendered incapable of working using smoking-related health issue, and minimised absenteeism from work (Evans et al 1999). The table below indicates the level of taxation on a packet of cigarettes as of January 2010 figures when tax comprised nearly 76% of the cigarettes’ retail price (Reed 2013). In the graph below, the rate of tobacco taxation is indicated based on historical perspective through indications of cigarette prices since 1990 (Reed 2013). As indicated in the figure, the period between1991 and 2001 cigarettes’ retail price rose by nearly 80 percent in real terms. To a great extent, the situation was explained by increased taxation. During the same period, the fraction of taxation within the retail price increased to 80 percent from 73 percent (Reed 2013). The increase was attributed to several policy decisions by the UK government. The first entailed the rise in VAT from 15 to 17.5 percent during the 1991 Budget. Second, the launch of a tobacco duty “escalator” during the 1993 Budget, where the government dedicated itself to increasing tobacco duties by a minimum of 3% each year in real terms. Third, the altering of the escalator during the 1997 budget, which showed that the government was dedicated to raising tobacco duties by a minimum of 5% each real-terms (Reed 2013). Again, starting from 2001, the government left the tobacco duty escalator while responding to disquiet that smuggling of tobacco into the United Kingdom had increased noticeably going as far back as the mid-1990s after the routine border controls among European Union states was removed. Some concerns that increasing the tobacco duty further may be counter-productive as it could as well promote smuggling. In the Budget of 2000, the Government allocated funds to strategy dubbed Tackling Tobacco Smuggling to tackle smuggling of tobacco head on. Again, since 2001 the volume of the United Kingdom’s illegal cigarettes market had reduced by nearly 50%. Again, from 2001 to 2007, taxation as a ratio of the retail price of cigarettes dropped by 4 percent from 80%. Some duties became up-rated to be consistent with inflation. This contributed to the rapid increase of non-tax element of the cigarette price more rapidly than inflation during this period. Hence, this led to a drop in the fraction of the cigarette prices. However, from 2007, marginal increase in taxation as a fraction of the retail price has been witnessed in the UK tobacco market (World Health Organization 2003). The trends of smoking prevalence in the United Kingdom show that the increase and decrease in the smoking prevalence have reflected the changes in cigarette duties. Comparison of the trends of cigarettes retail prices with historical data on the fraction of smokers within the UK population. As indicated in the figure below, the fraction of smokers within the adult population of UK (World Health Organization 2003). The smoking prevalence has declined significantly, from 45 percent of the entire population after the1974 budget to nearly 21 percent in 2008 9(Reed 2013). From1974 to1990, the decline in smoking was largely caused by smokers who quit from smoking. Despite this, the trend has altered from the mid-1990s to date. Although the fraction of ex-smokers has generally remained stable, the fraction of non-smokers has continued to grow, showing a lower adoption among the young individuals (Reed 2013). Data for the consumption of cigarette and e prices of cigarette data between 1970 and 1980 indicates that cigarette prices varied in the 1970s before rising steadily in the 1980s. In general, tobacco consumption dropped in the 1970s and 1980s, reflecting the fraction of smokers in the UK population. While the idea that smoking prevalence decline bit by bit in 1990s compared to the 1980s appears to be startling because of the steady rise of tobacco in the 1990s. Despite this, the rise in the size of the illegal tobacco market in the 1990s appears to give an explanation for the alterations in smoking prevalence. Other factors are, however, also attributed to the alterations (World Health Organization 2003). For instance, after a comprehensive strategy (such as ban on cigarette advertisement and banning advertising) to decrease the prevalence of smoking in 1998 was published, the smoking prevalence reduced. At the same time, the size of the illegal tobacco market also reduced significantly. Despite the trend of high taxation of tobacco, the effectiveness of the practice has been held in doubt. In a recent study by the Matrix Insight for Health England, it was revealed that increasing taxation has not done much to decrease tobacco use. The study had assessed 14 varied preventative health interventions on various criteria such as cost-effectiveness. A proportion of the population entitled to intervention, distributing benefits based on interventions intended for the lowest-income groups of the population scored highest. The study provided empirical evidence showing that the level of evidence for supporting the intervention had significant beneficial implications. The policy of escalating tobacco taxes for tobacco was however the second most effective (Reed 2013). Part B: Recommendations for taxation based policy initiatives The predominant reason for UK government involvement in controlling the tobacco market is to rectify market failures. However, smoking of cigarettes leads to negative spill-over cost to the society, because of higher medical costs that the patient does not bear. Other cause include second-hand smoke, and fire and safety hazards and unfavourable placement in the health insurance pool. As argued by Benson (2013), cigarette consumption has marginal social costs that significant prevail over the marginal personal and social benefits. It is based on this reason, according to Chaloupka et al (2011), that the government significantly imposes heavy taxes on cigarettes. Some scholars like Chaloupka et al (2011) have also argued that what motivates government intervention is due to the information asymmetry within the cigarettes market. For instance, the less educated individuals tend to be less health literate. They also lack the capacity to personalize the risks linked to tobacco use. Basing on the constrained maximization model, that the rational addict model pertains, a consumer will not maximize utility when he lack sufficient information on a product. Ultimately, the impacts of the taxation policy are felt to date in the UK. They are at historical high levels. Despite the high taxation levels, which are credited for the high cigarette prices, the pre-tax prices charged on the manufacturers are also considerably higher within the United Kingdom than other places in the world for tobacco. For instance, the pre-tax price of 20 a brand such as Benson & Hedges Special Filter was 93p in 2001 in the UK, while it was 48p in France (Reed 2013). Basing on these three motivations for taxation, four taxation-based policy initiatives are proposed. The taxation should be indexed to inflation The implications of a tax alteration will most likely bank on the original cigarette prices proportionate to the price of other commodities, the level of the tax in relation to the original price, and lastly the smoking population’s average income. In the case of the UK, the implications of tax have tended to erode over time except for when they are indexed to inflation. Alternatively, the taxations should be levied as a ration of the wholesale cost, in the event of high inflation rates (Benson 2013). Hence, caution should be taken against passing an “incomplete measure" on tobacco taxation, which only seeks to lift price classification freeze. These taxes should also be indexed to inflation. By indexing to inflation, it implies that whenever costs of common commodities like food rise, then the taxes on tobacco are also increased. When there is no such indexation, then it implies that inflation will ultimately erode tobacco taxes while tobacco products will become substantially affordable. For this reason, it will defeat the actual drive for taxing cigarettes to put off smoking (World Health Organization 2003). The necessity to reform the current taxation policy as well as to make the administration of tobacco taxes simpler is urgent. Still, there is an immediate need to see to it that there are comprehensive reforms. Indexing the tax to inflation would clearly be a major breakthrough towards rectifying the flaws in the current taxation policy. It will also ensure that tax collections are at pace with the increased cigarette prices (Benson 2013). The taxation should be fixed to funding beneficial programs The tax increases should be tied to financing the more extensive tobacco control campaigns. The negative implications of cigarette tax should afterwards be mitigated by purchasing or selling untaxed (smuggled) cigarettes since smokers will most likely go for the lower price cigarettes. In the UK for instance, when the government increases taxes on cigarettes, it experiences greater levels of tobacco smuggling. Countries like the United States have however managed to increase cigarette taxes without witnessing significant rise in tobacco smuggling. While more stringent penalties and law enforcement initiatives, such as tracking of cigarette consignments, has a potential to lessen the smuggling problem, many tobacco growers and manufacturers have tended to oppose higher taxes (Bader et al 2011). For this reason, they are likely to be tempted to smuggle cheaper raw materials to offset the cost of taxation. This may make the stringent measures of tracking of cigarette consignments less effective. At the same time, the smokers are also likely to be in opposition to the higher taxes. Despite this, some empirical studies have established that some smokers are likely to support the higher taxes when they are tied to tangible government initiatives, including plans to comprehensively fund cancer awareness campaigns. Indeed, this policy initiative is likely to gain significant acceptance. Because of the adverse effects of smoking, increased tax is likely to be politically tolerable as a way of reducing health costs or a comparatively effortless means to raising government revenues. Benson (2013) also argued that the regressive quality of the tax can be counterbalanced through the use of revenues to fund initiatives that greatly benefit the low income populations, including health literacy campaigns and funding schools. Unavoidable taxing The taxation policy should be made to be unavoidable. As Yurekli and Beyer (1999) explain, an effective policy should be able to lessen the excess burden of taxation by ensuring that the tax is tricky to evade or avoid. This can be ensured by when the excise tax rate for tobacco is increased. Such a policy is likely to decrease the harmful spill-over effects of smoking. The excise taxes select certain products like tobacco which are later taxed highly yet discriminatively to encourage smokers to avoid that burden as the tax shifts away from tobacco. For this reason the excise duties tobacco would make it difficult to escape tobacco taxation. It will increase the tax burden on smokers, particularly when the VAT is charged in addition to the excise duty (Benson 2013). Making the tax unavoidable even for the smuggled cigarettes will particularly be beneficial to the government. Such taxes will form a significant part of revenue collection. The government will have a larger base to capture, even from the smuggled products. It also makes it easy for the government to collect taxes. To the consumers, higher taxes would reduce tobacco consumption, as a result defraying the external costs of consumption tobacco, including the possibility of contracting lung diseases (World Health Organization 2003). Equitable redistribution of tax Lastly, the tax revenue from cigarettes should be redistributed more equitably across incomes, and a greater percent of spending should go towards preventative health and public health services. Currently, the inefficiencies are innate in the UK tobacco taxation, as the taxes have historically distorted the economic choices made by smokers and their dependants. Although the inescapable inefficiencies that taxation imposes are required to balance of the cost of providing some government programmes, minimizing the inefficiencies that tobacco taxation imposes is significant. Hence, the tax burden should be spread to be neutral over the broad tax base (Benson 2013). Conclusion Data on several indirect effects of increasing tobacco taxation show that increasing the retail price of tobacco leads to reduced number of individuals who smoke in the United Kingdom. This has led to significant health benefits as regards reduction of the early deaths from health conditions related to smoking within the population. At the same time, fewer people within the labour force have been rendered incapable of working using smoking-related health issue, and minimised absenteeism from work. Four policy recommendations for tobacco taxation are suggested. By indexing to inflation, it implies that whenever costs of common commodities like food rise, then the taxes on tobacco are also increased. The tax increases should be tied to financing the more extensive tobacco control campaigns. The negative implications of cigarette tax should afterwards be mitigated by purchasing or selling untaxed (smuggled) cigarettes since smokers will most likely go for the lower price cigarettes. The taxation policy should be made to be unavoidable. An effective policy should be able to lessen the excess burden of taxation by ensuring that the tax is tricky to evade or avoid. Lastly, the tax revenue from cigarettes should be redistributed more equitably across incomes, and a greater percent of spending should go towards preventative health and public health services References Bader, P, Boisclair, D & Ferrence, R 2011, "Effects of Tobacco Taxation and Pricing on Smoking Behavior in High Risk Populations: A Knowledge Synthesis," Journal of Environ Res Public Health, 8(11): 4118–4139. Benson, M 2013, "Cigarette Taxes and Consumption: An Economic and Policy Analysis,” Senior Honors Projects. Paper 19. Chaloupka, F, Levy, D & Huang, J 2011, The Impact of Tax and Smoke-Free Air Policy Changes, Robert Wood Johnson Foundation, Princeton Evans, W, Ringel, J & Stech, D 1999, "Tobacco Taxes and Public Policy to Discourage Smoking," Tax Policy and the Economy, vo l, pp.1-56 Levy, D, Chaloupka, F & Gitchell, J 2004, "The Effects of Tobacco Control Policies on Smoking Rates: A Tobacco Control Scorecard," J ofournal Public Health Management Practice, vol 10 no4, 338–353 Reed, H 2013, The Effects of Increasing Tobacco Taxation: A Cost Benefit and Public Finances Analysis, Landman Economics, London World Health Organization 2003, Report on Tobacco Taxation in the United Kingdom, viewed 4 Nov 2015, Yurekli, A & Beyer, J 1999, Design and Administer Tobacco Taxes, World Bank, Washington DC Read More